Farmers National Banc Corp. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results. The company is an Ohio-based financial holding company operating banking, trust, insurance and investment businesses, principally in northeastern Ohio and western Pennsylvania. The January 2020 Maple Leaf Financial acquisition materially expanded the business.
Financial results
Amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Net interest income | $23.9 | $20.5 | $46.2 | $40.5 |
| Provision for loan losses | $2.4 | $0.8 | $3.5 | $1.3 |
| Noninterest income | $9.1 | $7.1 | $17.0 | $13.8 |
| Noninterest expense | $17.7 | $16.8 | $36.5 | $32.9 |
| Net income | $11.0 | $8.5 | $19.7 | $16.9 |
| Diluted EPS | $0.39 | $0.31 | $0.69 | $0.61 |
| Net interest margin, tax-equivalent | 3.74% | 3.84% | 3.74% | 3.83% |
| Efficiency ratio, tax-equivalent | 50.75% | 58.28% | 55.04% | 58.06% |
Q2 net income increased to $11.0 million from $8.5 million. Higher net interest income and mortgage-loan sale gains contributed to growth; a larger loan-loss provision and higher operating expenses partly offset it. Mortgage-loan sale gains were $3.7 million in Q2 2020 versus $1.1 million a year earlier. Q2 annualized return on average assets was 1.56% and return on average equity was 14.02%, compared with 1.45% and 12.34%, respectively, in Q2 2019.
For the first half, operating cash flow was $19.1 million, investing cash flow was a use of $162.6 million, and financing cash flow provided $176.7 million. Cash and cash equivalents increased $33.2 million to $104.0 million.
Financial position and liquidity
| Metric | June 30, 2020 | December 31, 2019 |
|---|---|---|
| Total assets | $2,879.6 million | $2,449.2 million |
| Gross loans | $2,143.6 million | $1,811.5 million |
| Total deposits | $2,439.5 million | $2,009.0 million |
| Stockholders’ equity | $331.4 million | $299.3 million |
| Short-term borrowings | $3.4 million | $77.1 million |
| Long-term borrowings | $76.7 million | $45.1 million |
Loan growth included $199.1 million of Paycheck Protection Program (PPP) loans. The allowance for loan losses was $17.0 million, or 0.79% of loans; nonperforming loans were $12.2 million, or 0.57% of loans. Management stated that the allowance was adequate, while noting economic uncertainty and the possible effects of payment deferrals.
Management said liquidity was adequate. The Bank had $104.0 million in cash and cash equivalents, an unused $35 million bank credit line, and approximately $580.6 million of additional Federal Home Loan Bank borrowing capacity. Regulatory capital ratios remained above minimums: consolidated common equity tier 1 was 12.65% and total risk-based capital was 13.92%; the Bank was classified as well capitalized. The company reported an equity-to-assets ratio of 11.48%.
Material changes and unusual items
- Maple Leaf acquisition: Completed January 7, 2020 for total consideration of approximately $43.0 million, including $20.4 million cash and $22.6 million in stock. It added $183.3 million of deposits and generated $9.2 million of goodwill. Reported period comparisons include the acquired business only after closing; the filing also supplies unaudited pro forma information.
- COVID-19 assistance: At June 30, 272 loans totaling $66.5 million had payment deferrals; by July 24, the reported balance had declined to $38.0 million across 116 loans. A selected group received second three-month deferrals. The company facilitated PPP loans for 1,675 business customers, with $199.1 million outstanding at quarter-end.
- Fees and credit provision: The company waived $780,000 of fees during the first half and warned fee income could remain affected. Q2 loan-loss provision rose to $2.4 million from $750,000; management cited worsening economic factors.
- CECL: The Bank postponed adoption of the expected-credit-loss standard under CARES Act relief. The company estimated that adoption on January 1, 2020, before considering pandemic-related effects, could have increased the allowance by 15%–20% of its December 2019 balance.
- Expenses and legal matter: Q2 merger-related costs were $48,000. A $505,000 accrual recorded in 2019 for a pending legal settlement remained on the books; expected insurance recovery had not been recorded.
- Share repurchases and dividends: The repurchase program was suspended during the first half. The company declared $0.22 per share in dividends during H1 2020, versus $0.18 in H1 2019.
Outlook, commentary and risks
The filing gives no specific earnings or full-year numerical guidance. Management expected cash and cash equivalents to move back toward December 2019 levels over the following months as funds were used for loan growth and securities purchases, and intended to maintain the securities portfolio at approximately its current share of assets. Management emphasized that the duration and effects of COVID-19 were uncertain.
COVID-19 risks include borrower repayment deterioration, fee and interest-income pressure, business-continuity disruption, higher credit losses, and possible reliance on more costly funding. The company noted that some loans with deferrals may not be past due under reported aging measures. Loans to identified vulnerable industries—restaurants, hotels, golf courses and energy—totaled $103.5 million, or 4.82% of loans.
Interest-rate modeling showed a 1.1% decline in net interest income under a 100-basis-point rate decrease and a 13.9% decline in the net present value of equity under that scenario. The latter exceeded the company’s stated internal policy limit of a 10% decline; management said it would continue to monitor the exception. A 300-basis-point increase was modeled to reduce net interest income by 1.4% while increasing net present value of equity by 21.5%.
Important facts for investors to verify
- Whether deferred borrowers resume payments and how deferrals, PPP loans and forgiveness affect delinquency, credit losses, interest income and the allowance.
- How much future earnings growth depends on mortgage-loan sale gains, which rose sharply amid refinancing activity, versus recurring revenue.
- Whether net interest margin remains pressured by low rates, PPP loan yields and changes in funding costs.
- Integration progress, realized cost savings and any impairment risk related to the Maple Leaf acquisition and resulting goodwill.
- Management’s response to the interest-rate sensitivity policy exception, and the status and recoverability of the accrued legal settlement.
- The cash-flow discussion contains a difference between the cash-flow statement’s investing outflow ($162.6 million) and the MD&A narrative’s stated amount ($168.7 million); verify the intended figure against the filing’s detailed schedules.